While some financial wisdom is timeless, the world we live in today has experienced vast changes in its economic and financial landscape. And with changing times comes a need for better, newer financial advice.
Here are some pieces of financial wisdom you’re better off leaving in the past.
Old Tip #1: The 50-30-20 Rule
You’ve likely heard this tip about budgeting. The idea is to spend 50% of your earnings on needs, 30% on wants, and 20% in savings. Some would even tell you to just put 10% away! Here’s the reality: it’s not enough. Statistics show that although 62% of Americans have retirement savings, only 28% feel that they’re on track.
With inflation at a 30-year high, that only makes savings efforts that much more ineffective. You’d be much better off investing that 20% and reducing both your need and want spending to contribute an additional 10% or so to savings. Make your money work for you! It’s the only way to meet lofty retirement savings goals.
Old Tip #2: Pay Down Debt, Then Invest
When it comes to investing, time is precious. Conventional wisdom tells you to dig out of debt – from student loans, credit cards, mortgages, etc. – before you invest. While paying down debt is key to your fiscal well-being, it doesn’t mean you should delay investing. Investments are most effective when they can grow over a long period of time. Putting it off for a few years can dramatically decrease your earning potential.
Old Tip #3: You Should Have X Dollars Saved By…
Benchmarks can be helpful, but generalizations can be more discouraging than anything. The truth is that savings needs and demands – in general or for retirement – vary between individuals and households. A California resident will have drastically different savings needs than a Tennessee resident. It’s okay to look at these benchmarks for ideas, but consider your individual retirement needs, cost of living, desired lifestyle, etc., when considering how much you should save.
Old Tip #4: A Home is a Great Investment
Real estate is a great investment. A personal residence is not. While yes, your personal home is likely to appreciate along with any other kind of real estate, there are some distinct differences between investment properties and personal residences.
For one, you do not have the same level of maintenance and management for your personal home. The same level of attention to detail and diligence just isn’t there. You’re much more likely to put off repairs and remodeling until it’s “needed,” or in other words: when it becomes a problem.
At present, your home is a liability and not an asset. Assets put money in your pocket. Liabilities take them. Relying on a one-time home sale to make up for decades of liability just isn’t worth it.
Owning a home isn’t a bad thing – just don’t treat it like your nest egg!
Old Tip #5: Cash is King
Young people are commonly advised to avoid credit at all costs. They’re taught to pay in cash (or at least, with debit). In today’s world, though, credit is very much necessary. It’s how we get approved for loans of all kinds, including mortgages. Credit comes with its fair share of risks, but it also offers things like cashback advantages and other savings opportunities. At long as you pay off your balance and avoid accruing interest, credit can be a great financial asset!
Old Tip #6: Keep Your Money in Savings
The only difference between keeping your money in savings or tucked under your mattress is that you won’t lose your savings account to a house fire. Savings accounts usually have low interest rates. You’ll earn negligible amounts over time and not near enough to keep up with inflation. Your money is just sitting there.
While it’s prudent to keep some savings and emergency funds squirreled away, you’ve got to make your money work for you. Put it towards investments that pay dividends or generate passive income.
Old Tip #7: Money Talk is Taboo
There are three traditional taboos in “polite” American conversation: religion, politics, and money. Let’s kill the idea that we shouldn’t talk about money. This is particularly true when we’re dealing with spouses and partners – they should be well-aware of your financial status, strategies, goals, and ideas. You’re a team that needs to be on the same page and finances should be a regular “check-in” topic throughout the month.
Beyond that, though, talk about money with friends and colleagues. There’s a lot we can learn from other people’s strategies, successes, and mistakes. Increasing financial literacy demands that we think – and talk – about money matters.
